The Economy of Germany

German Economy

Economy - overview: The German economy - the fifth largest economy in the world in PPP terms and Europe's largest - began to contract in the second quarter of 2008 as the strong euro, high oil prices, tighter credit markets, and slowing growth abroad took their toll on Germany's export-dependent economy. At 1.7% in 2008, GDP growth is expected to be negative in 2009. Recent stimulus and lender relief efforts will make demands on Germany's federal budget and undercut plans to balance its budget by 2011. Strong growth in 2007 led unemployment in 2008 to fall below 8%, a new post-reunification low. This suggested the reforms launched by the former government of Chancellor Gerhard SCHOEDER, deemed necessary due to chronically high unemployment and low average growth, had had the desired effect. The current government of Chancellor Angela MERKEL has initiated other reform measures, such as a gradual increase in the mandatory retirement age from 65 to 67 and measures to increase female participation in the labor market. Germany's aging population, combined with high chronic unemployment, has pushed social security outlays to a level exceeding contributions, but higher government revenues from the cyclical upturn in 2006-07 and a 3% rise in the value-added tax cut Germany's budget deficit to within the EU's 3% debt limit. The modernization and integration of the eastern German economy - where unemployment exceeds 30% in some municipalities - continues to be a costly long-term process, however, with annual transfers from west to east amounting to roughly $80 billion. While corporate restructuring and growing capital markets have set strong foundations to help Germany meet the longer-term challenges of European economic integration and globalization, Germany's export-oriented economy has proved a disadvantage in the context of weak global demand.

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